In April 2025, US housing starts were reported at 1.361 million, slightly below the forecast of 1.365 million. The previous month’s housing starts were 1.324 million.

Building permits for April measured 1.412 million, falling short of the expected 1.450 million. In the prior month, permits were reported at 1.467 million.

Housing Market Sentiment And Yields

The National Association of Home Builders’ sentiment reading recently matched its worst since 2022. Additionally, US 30-year yields have risen to 5% this week.

This recent batch of housing data reveals a mild softening, particularly in forward-looking indicators. The small shortfall in housing starts points to a market where construction momentum has not picked up in line with expectations. The fact that last month’s figures were revised upward suggests that recent activity might not be as sluggish as it first appears, but the current month’s undershoot still weighs on near-term projections.

More pressing is the drop in building permits, which tends to precede actual building activity by one or two quarters. The lower-than-expected permits signal caution among developers before committing capital, especially when borrowing costs are this high. That hesitation has spilled over into sentiment, with builders now more pessimistic than at nearly any point in the past three years.

Then there’s the move in 30-year yields hitting 5%. We see this not just as a simple rise in long-end rates, but as a reflection of fixed-income markets recalibrating their view on inflation’s persistence and the path of policy. Those borrowing for long-term projects will feel the pinch most acutely. It now costs more to roll existing debt, especially for leverage-heavy players who can’t wait for lower rates.

From a trading perspective, rate-sensitive instruments are showing higher sensitivity to this type of data, even if the misses are small. The breadth of response in housing-related equity names and rate futures has widened, indicating that markets are reassessing risk across multiple assets rather than focusing on the headline prints alone.

What caught our attention was the narrowing gap between monthly starts and permits. When permits fall faster than groundbreakings, it’s usually a signal that activity is likely to cool further in the months ahead. This isn’t the kind of dislocation that resolves immediately—it suggests a drag developing in future construction flows rather than a sharp shock.

The Market Outlook

With long-end rates now at 5%, we have to adjust our expectations about where implied volatility might head next across the yield curve. Positioning reflects that fear—OTM payer skew has risen in recent sessions. In terms of options pricing, the belly of the curve is carrying more premium than previous weeks, hinting that traders expect movement in mid-duration instruments too.

Looking ahead, we’re likely to see more two-way action depending on how inflation and employment data come in. If consumer borrowing weakens along with housing, fixed income longs may test the patience of the shorts. But until then, the steeper curve is favouring steepener trades, particularly through 2s/10s and 5s/30s expressions, where funding cost considerations are becoming more visible.

It’s not just about the macro signals. The combination of soft permits, poor sentiment, and high rates makes a dent in demand. Homebuilders aren’t just reacting to the cost of debt—they’re also reading forward-looking demand from banks and buyers, both of whom are turning more defensive.

We recommend staying alert to any shifts in mortgage applications and secondary market flow. These indirect indicators often front-run what we eventually see in the official permit and start figures. Given the environment, even smaller disappointments in data don’t get ignored. They feed into a broader narrative about where growth risks are shifting, with construction being one of the first real-economy sectors to show its hand.

It’s also worth noting that any signs of tightening labour in the construction space would undercut the case for easing, even if housing data softens further. So far, we haven’t seen that—but it remains a sensitivity worth monitoring in expectations pricing.

Trading desks will need to stay nimble and less reliant on static calendar spreads. Tactical flexibility and quick recalibration based on realised data will produce better outcomes under these conditions.

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Japanese Economic Contraction and Interest Rates

The EUR/JPY pair stabilises around 163.00, following a recovery from earlier losses. This stabilisation occurs as the Japanese Yen experiences a slight decline after Japan’s Q1 GDP data reveal a contraction.

Japan’s Cabinet Office reports a 0.2% economic contraction in the first quarter, exceeding expectations of 0.1%. On an annual basis, the economy shrank by 0.7%, compared to the anticipated 0.2%.

This weak economic data might dissuade the Bank of Japan from raising interest rates in the near future. Toyoaki Nakamura, a BoJ board member, warns of economic risks due to US-imposed tariffs contributing to global uncertainty.

The Euro remains steady amid forecasts of further interest rate cuts by the European Central Bank. ECB officials consider cuts due to potential economic risks and ongoing disinflation in the Eurozone.

ECB’s Martins Kazaks anticipates potential cuts in the deposit rate, currently at 2.25%. The Japanese Yen, a major global currency, is influenced by Japan’s economy, BoJ policy, and bond yield differentials.

The Yen’s value is also affected by market risk sentiment, often seen as a safe-haven investment during financial stress. Turbulent periods can strengthen its value against perceived riskier currencies.

Yen Safe Haven Status and Market Volatility

With EUR/JPY steadying near the 163.00 mark, we see a measured recovery following earlier downward pressure. The move aligns closely with a bout of softness in the Japanese Yen, which came immediately after first-quarter GDP figures showed the Japanese economy contracted more than expected. The Cabinet Office reported a 0.2% quarterly decline—admittedly not a collapse, but more pronounced than the 0.1% fall that had been forecasted. On an annualised basis, the 0.7% drop compared to an expectation of just 0.2% reflects deeper underlying challenges.

This weaker-than-expected performance places a firm question mark over any near-term tightening from the Bank of Japan. Nakamura, speaking for the BoJ, flagged external pressures—particularly US tariffs—as possible contributors to growing financial fragility globally. This tone reflects a broader message: the central bank is unlikely to risk squeezing policy while output is already receding.

At the same time, the Euro is holding steady. That’s not to suggest strength, but rather resilience in the face of sliding expectations for how much further the European Central Bank can sustain tight policy. Officials, including Kazaks, have openly discussed rate cuts as a response to disinflation and softening macro indicators across the bloc. The deposit rate, currently sitting at 2.25%, could see downward adjustments if consumer price growth continues losing momentum.

Now, if we step back and consider interest rate policy expectations on both sides, it’s evident that there’s growing divergence—or at least perceived divergence—in central bank trajectories. The BoJ, already grappling with slowdown, may need to hold accommodative policy longer than previously thought. Meanwhile, the ECB, although once aligned with tightening efforts, appears gradually shifting towards support amid cooling prices.

For those of us observing short-term rate spreads, this matters. The Yen’s ability to regain ground could fade if traders lean further into these widening expectations. Given the Yen’s long-standing status as a refuge during uncertainty, flows supporting its strength might only resume if broader markets turn defensive. That hasn’t happened—at least not convincingly.

The next few weeks may challenge assumptions made earlier this year. Any further downside surprises in Japan’s economic releases could reinforce the impression that a rate hike remains out of reach. Likewise, dovish commentary out of Frankfurt may gain weight if inflation prints in the Eurozone show more softness than recent ones. Pay close attention to revised GDP data, not just headline numbers. Even small changes could rattle bond markets and, by extension, shift currency pricing.

From a volatility standpoint, the EUR/JPY pairing has entered a more stable region, but pricing remains sensitive to forward policy indications. We should expect options markets to reflect a degree of this fragility, particularly in maturities aligning with upcoming BoJ or ECB meetings. If implied volatility begins to pick up, it might be less about immediate movement and more about hedging as uncertainty pools ahead of key releases.

The safe-haven character of the Yen won’t disappear, but for now it’s being overshadowed. Traders are leaning on relative rate expectations. If risk sentiment deteriorates suddenly—perhaps on geopolitical news or unexpected data shocks—there could be a sharp reverse. Until then, the differential in forward yields is applying steady pressure.

As such, near-term positioning should stay responsive rather than predictive. Watching policy language—and adjustments to yield curves—may deliver better clues than broad macro trends. We’ve seen before how quickly sentiment can flip, and it’s rarely on schedule.

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In April, US import prices experienced a slight rise of 0.1%, contrasting with an expected decline of 0.4%. Export prices also went up by 0.1%, defying predictions of a 0.5% reduction. The previous month’s import prices were revised from a 0.1% decrease to a 0.4% drop. Export prices in the prior month were adjusted from no change to a 0.1% increase.

Year-on-year, import prices saw a marginal increase of 0.1%, differing from an earlier figure of 0.9%. Export prices grew by 2.0%, which is lower compared to the former 2.4% rise. The surge in nonfuel import prices surpassed the decline in fuel import prices during April.

Trade Related Inflation Changes

The existing data indicates a subtle shift in trade-related inflation pressures. The month-on-month import price change, though small, contradicted market expectations. Rather than falling, prices ticked slightly higher, which suggests some price stability for foreign goods entering the US. On the export side, items leaving the country also showed limited price gains – just enough to avoid a decline yet not so much as to signal overheating.

More revealing is the revision of prior months. What had seemed like a tame dip in import prices earlier in the year now looks deeper, while export prices were gently stronger than first estimated. That likely hints at pricing dynamics that are a bit firmer than what markets were originally working with.

Yearly figures offer a touch more clarity. Import prices hardly budged from last April, meaning there’s been almost no inflationary pressure from goods bought overseas over twelve months. Still, it’s worth paying attention that the 0.9% yearly change previously reported was an overstatement. Similarly, export prices grew, but less than previously reported. The takeaway: the overall environment is more stable than headline numbers might have implied earlier.

Within the details, nonfuel import prices edged up and effectively counterbalanced falling energy costs. That matters more than just in passing. Energy prices often see sharp fluctuations, so the fact that broader goods sustained a small rise shows strength in categories like machinery or consumer goods.

Market Reactions and Considerations

Now, in a setting where we see more resilience in traded goods pricing than markets had been primed to expect, it becomes practical to respond to what is rather than what might have been feared. Derivatives with exposure to futures linked to traded goods or inflation-linked notes could show more durable pricing patterns, especially if the fuel price easing persists while nonfuel categories strengthen.

The price revisions alone hold weight. When earlier data quietly shifts under us like this, we’re reminded not just to look to today’s numbers, but to the accuracy of what we thought we’d already priced. If export strength is being understated and import weakness overstated, we shouldn’t delay recalibrating models accordingly. Price adjustments now point toward modest firmness rather than slack.

For anybody watching implied volatility around inflation data – this calls for tightening probabilities around overly bearish scenarios. The wide misses some were positioning for may not be worth defending if this is the kind of flat but upward pattern we see unfold. We’re not looking at surprises exploding off the chart, but the lack of contraction means it’s no longer wise to hedge for downside in the traditional way. The price data is speaking softly, but it’s not drifting.

Traders looking at spreads between goods might want to focus more clearly on residual strength in categories unaffected by fuel. If fuel import prices keep slipping, yet the broader price group continues to edge upward, there’s less need to brace for wholesale drops in traded value. That change of direction plays out slowly – but it’s worth acting accordingly now.

Where earlier sentiment relied on imported softness to temper broader inflation, that might need reevaluation in light of these updates. Data like this, small on the surface but packed below, tends to reshape positioning more than it first appears.

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Talks In Turkey

The US Dollar remains unmoved after talks in Turkey between Ukraine and Russia yielded no progress. The Dollar Index is below 101.00 as it attempts to stabilise, with traders questioning the Greenback’s reliability amid fluctuating US trade policies.

Economic data shows a retreat in the US Dollar, with the Producer Price Index falling unexpectedly in April and Retail Sales only rising by 0.1%. Meanwhile, President Trump plans to set new tariffs, affecting 150 countries in the coming weeks.

In Istanbul, meetings between Ukraine and Russia ended without any results. Recent US economic indicators include a drop in April’s Housing Starts to 1.361 million and Import Prices increasing by 0.1%.

The Michigan Consumer Sentiment Index fell to 50.8, while the 5-year inflation forecast rose to 4.6%. The Federal Reserve’s June meeting shows an 8.2% chance of a rate cut, with US 10-year yields at 4.41%.

Market participants are uncertain over the US Dollar’s future, pondering the impact of US policies. Current resistance for the Dollar Index is 101.90, with significant support levels beneath 100.22. The Fed’s monetary policy aims at price stability and full employment, with interest rates and quantitative easings as tools.

Quantitative easing, employed during times of crisis, decreases the Dollar’s value, while quantitative tightening generally strengthens it.

Economic Indicators And Market Reactions

These developments paint a clear picture: the US Dollar has been facing downward pressure not solely due to the monetary policy signals, but also as a result of weak macroeconomic data and wavering confidence in trade direction. From our side, examining bond and index-linked instruments has helped illuminate the source of this hesitation. The lack of breakthrough in diplomatic efforts abroad does little to support risk-on sentiment, and so any upward movements in Dollar-based positions may likely encounter resistance before the 101.90 level is tested meaningfully.

After the Producer Price Index pulled back more than expected and Retail Sales barely showed movement, there’s tangible reason for caution. These figures don’t support a strong consumer-led recovery story. They’re giving us more evidence that the underlying economic momentum might be softening. In turn, derivative instruments tied to rate expectations and yield spreads may continue to price in lower economic heat — which doesn’t sit comfortably with the slight uptick in inflation forecasts.

One might call the current numbers from Michigan concerning — consumer sentiment reaching 50.8 speaks to deeper unease. That alone would warrant keeping a close eye on yield curves. When 10-year Treasury yields hold steady near 4.41% despite softer economic data, it shows us that markets aren’t fully buying into the idea of a Fed pivot just yet. The limited odds of a rate cut at 8.2% remain in line with this durability — unless we get a considerable downside surprise in upcoming indicators.

Trump’s tariff rollout could introduce yet another layer of strain. Targeting such a broad sweep of trading partners raises direct questions concerning supply chain security and the cost base for importers. Historically, announcements of this scale tend to move options volatility higher, and we should assume this time won’t be any different. Volatility pricing, especially across short-dated straddles or strangles in equity index derivatives, may begin reflecting elevated uncertainty around pass-through inflation.

Housing Starts declining to 1.361 million for April suggest hesitation in construction — one of our usual early indicators for domestic optimism and dollar liquidity use. Added to that, a modest 0.1% increase in Import Prices suggests there aren’t strong inflationary pressures coming from abroad just yet. As a result, if we observe further balance sheet reduction or lean commentary toward tightening from the Fed, its impact may be undermined without stronger domestic support.

In technical terms, the Dollar Index now appears to have formed a soft floor near 100.22. Should this level give way, it opens conditions for accelerated downside risk in Dollar-denominated assets — and with it, a possible reconfiguration of USD pairs. Support-test failures of this kind often produce quick follow-through, so option market positioning into the following weeks may benefit from hedging skew shifts or recalibrating risk-reward profiles.

Current policy tools — rates and quantitative measures — remain in focus. Given that quantitative easing tends to swell liquidity and weaken the Dollar, and tightening acts inversely, it’s decision-making at the margin that will likely matter most in coming sessions. Any deviation in messaging from Fed members, particularly around the pace and depth of balance sheet reductions, should be viewed as potentially catalytic for volatility in currency futures and swaps spreads. We’ll be watching positioning changes closely.

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The Michigan Consumer Expectations Index in the United States was recorded at 46.5, falling short of the anticipated 48 in May. This data release reflects a decrease in consumer outlook compared to expectations.

Concurrently, the US Dollar strengthened as US consumer inflation expectations rose, according to the University of Michigan survey. This bolstered the dollar against other currencies, such as driving the GBP/USD currency pair down to 1.3250.

Gold Market Performance

The gold market saw a downturn, dropping below the $3,200 mark following a bullish run the previous day. The decline was influenced by a strengthening US Dollar and the easing of geopolitical tensions.

In the cryptocurrency sphere, Ethereum’s price surged above $2,500, signifying a rebound index of nearly 100% since April. The ETH Pectra upgrade has led to over 11,000 authorisations in a week, indicating rising engagement by wallets and decentralised applications.

Furthermore, recent engagements during President Trump’s May 2025 trip to the Middle East have resulted in large-scale agreements. These moves are designed to strengthen US trade relationships and support America’s influence in defence and technology sectors.

Indicators and Market Strategies

These latest figures from Michigan highlight a noticeable dip in consumer sentiment, particularly regarding future financial situations, job prospects, and general economic conditions. Rather than brushing this off as a seasonal low or a statistical blip, the undershoot of expectations serves as a reflection of growing caution at the household level, perhaps influenced by tightening credit conditions or lingering inflation. For those of us analysing the derivative contracts linked to retail indexes or sentiment-based instruments, this provides a context worth factoring more precisely into short-term positioning.

At the same time, inflation expectations recorded by the same survey point toward a shift in where consumers think prices are heading. Inflation anticipation ticked upwards to 3.3%, suggesting that households still view price pressures as somewhat persistent. What followed was a firming in the US Dollar, as markets re-calibrated interest rate outlooks. The greenback’s gains weren’t modest either—its strength forced the British pound down by nearly 200 basis points. Exchange rate derivatives linked to GBP/USD are now adjusting rapidly, with implied volatility climbing on shorter timeframes. We’re seeing renewed hedging of dollar-denominated assets, and some movement back into safe haven positions which had earlier seen outflows.

In turn, the gold correction wasn’t unexpected. A firm dollar often dampens metals demand, but paired with a marked reduction in military risk abroad, gold’s narrative shifted in a matter of hours. The psychological level of $3,200 was ultimately breached as bids dried up. Traders looking at metals contracts closer to expiration are likely reassessing risk-reward scenarios, especially as haven demand seems to be idling rather than accelerating. Call options appear less attractive when upside momentum is stripped away by currency firmness and macro calm.

On the digital front, Ethereum’s recent performance continues to break norms. A recovery of this magnitude—doubling in less than three months—demands closer inspection across DeFi derivatives and smart contract indexing strategies. Fuelled by an active response from decentralised apps and more than 11,000 permissions processed since the Pectra upgrade rollout, it’s become increasingly hard to ignore Ethereum’s structural support. Popular strategies like straddle positions have begun pricing in wider tails, reflecting the heightened possibility of further jumps or, conversely, a sharp retrace if momentum fails to hold post-upgrade.

As for the geopolitical backdrop, the Middle East visit by Trump has led to several output-heavy agreements. Though broader in scope, these arrangements directly bolster defence manufacturing flows and technological export frameworks. These sectors are of interest to traders watching US industrial and defence-linked derivatives where price action often reacts strongly to international policy changes. Weeks ahead hold more data and forward guidance, but with newly embedded supply contracts in place, appetite in related indices may continue repositioning favourably, especially when linked to bond yields and equity futures in aerospace or cybertech.

This all creates a web of reactions that pushes us toward clearer allocation shifts. The signals are there. Currency pairs, commodities, and tech-related crypto assets are branching out along distinctly new volatility tracks. That’s not something we can delay acting on.

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In the United States, consumer inflation expectations for one year rose to 7.3% in May, up from a previous 6.5%. This increase reflects the general sentiment about price levels over the next year.

Inflation Expectations And Economic Impact

The figures demonstrate an upward trend in inflation expectations, which can influence economic forecasting and monetary policy decisions. Monitoring these expectations helps understand the anticipated direction of inflation in the short term.

With May’s rise to 7.3% from 6.5% in consumer inflation expectations, it’s not just a psychological shift—this sharp move provides a practical gauge of how households anticipate purchasing power will change in the coming year. When these forward-looking views accelerate, they start to influence everything from wage demands to how businesses set future prices, shaping broader pricing behaviour well before it appears in final consumer indexes. For traders, this change reflects momentum that can’t be ignored.

We could interpret this jump as a proxy for growing concern among households about sustained cost pressures. The path from expectation to economic reality isn’t guaranteed, but key market actors will watch closely because these expectations often trigger preemptive responses. When people expect inflation to rise, they act in ways that can reinforce that trend—spending sooner, protecting value with assets, or pushing for hedges.

It’s worth contextualising this within monetary policy. A persistent climb in one-year inflation outlooks can pressure central policy adjusters to act more assertively, especially if it suggests inflation is not anchored. While official rate actions may lag behind these figures, derivative markets tend to price in that risk considerably earlier. From our perspective, tools like swaps and futures begin to adjust even before firm decisions come from central banks, making it essential to remain adaptive.

Inflation Confidence And Market Dynamics

Looking underneath, any deterioration in inflation confidence increases implied volatility across term structures. We’ve already observed shifts in short-end rate products, where the liquidity is deepest and the sensitivity to these kinds of movements is most immediate. Any repricing here offers clear insight into where smart money expects policy direction to lean next. That can’t be dismissed lightly, as it flows directly into valuations elsewhere—especially in curve trades or spread positioning.

It’s easy to focus too much on year-ahead expectations in isolation. But the real value lies in how these align—or diverge—from longer-term estimates. When shorter-term inflation views spike above multi-year projections, it creates kinks in the breakeven curve, which we’ve seen disturb usual carry strategies. That divergence is a tradeable signal in itself. Seasonality doesn’t cover this jump, so what we now have is a shift in sentiment that is broader and closer to embedded inflation risk.

For those of us modelling derivative exposures, the tactical implication is that existing volatility assumptions may get tested. Short-term option premiums should be re-evaluated, especially in rate-sensitive instruments where re-hedging costs rise when inflation prints surprise upward. Medium-dated positions might now warrant theta reassessments, as duration exposure is no longer as predictable.

Minimal tolerance now exists for downside surprises in inflation futures. Markets will move quickly as participants respond to each data release with a tighter bias toward earlier cuts or extended holds. We’ve not yet reached the inflection where pricing aligns fully with these expectations, which leaves a gap commentators may call “policy lag”, but for us it’s an area of opportunity.

The emphasis, therefore, should lie in watching how closely forward inflation expectations continue moving against realised data. If inflation reads even slightly warm in the short term, this growing sentiment will be seen as confirmation rather than speculation. Thus, dislocations between realised and expected numbers offer volatility to capture.

Any outlook grounded on assumptions that inflation has peaked appears increasingly fragile. Existing models depending on stabilised price growth need revisiting. The heightened expectation seen now heightens risk sensitivity across asset classes, but especially for instruments that are path-dependent.

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The United States Michigan Consumer Sentiment Index stood at 50.8 in May, falling short of the anticipated 53.4. This data point reflects consumer confidence in the economic outlook and is crucial for assessing consumer spending behaviour.

EUR/USD experienced a decline to three-day lows around 1.1130. Despite the decrease in the U-Mich index, the US Dollar gained support as inflation expectations rose.

GBP/USD dropped back to 1.3250 as USD buying intensified, indicating strong US Dollar movement. The rise in US consumer inflation expectations contributed to this trend, according to data from the U-Mich survey.

Gold Prices And Us Dollar Movement

Gold prices fell sharply below the $3,200 mark after a previous rally, affected by a recovering US Dollar and decreased geopolitical tensions. The XAU/USD remains on track to register its largest weekly loss of the year.

Ethereum’s price remained stable above $2,500 following a significant increase since April. Increased adoption of the ETH Pectra upgrade demonstrated positive market reaction with over 11,000 EIP-7702 authorisations in a week.

President Trump’s Middle East visit led to numerous high-profile deals intended to bolster US trade relationships. This development aims to correct trade imbalances and strengthen American leadership in defence and technology exports.

The lower-than-expected Michigan Consumer Sentiment Index in May, which came in at 50.8 against forecasts of 53.4, points to weaker confidence among households regarding the future state of the economy. A result this subdued often precedes more cautious discretionary spending, which tends to feed back into retail and services demand metrics over the following quarters. It can be tempting to interpret this sentiment drop as a buy signal for risk assets, especially when viewed in isolation, but that would miss the wider implications of the inflation expectations buried within the same report. Those expectations shifted higher—even as overall sentiment dipped—and that nuance rebalanced trader sentiment sharply toward the dollar.

This dynamic was reflected most clearly in the EUR/USD and GBP/USD pairs, both of which reversed their earlier moves. The euro’s slip to 1.1130, a level last seen three sessions ago, may seem confusing at first given the soft consumer data. However, we need to remember that the bond market reacted more to the pricing in of stickier inflation than to the sentiment surprise. Our experience tells us that when expectations of longer-lasting inflation rise, traders often pre-emptively back the greenback to hedge across assets—an instinct that was present again here.

Sterling followed a similar path. The pound fell back to 1.3250 against the dollar, largely as a result of increased USD buying across the board. It’s clear that inflation fears nudged Treasury yields up again this week, drawing flows toward dollar-denominated assets. The post-survey adjustment was rapid, with speculative positions reflecting this shift almost as soon as the revised data crossed the wires.

Gold And Ethereum Price Stability

In the commodities space, the sharp move lower in gold, slipping under the $3,200 level, marked a break after weeks of climbing momentum. Weakened geopolitical risk, including a few de-escalations in regions that typically support safe-haven bids, effectively removed one of the primary drivers behind the recent rally. Overlay that with a reinvigorated dollar and short-term technical triggers, and the sell-off was both sharp and widespread. Weekly forecasts show XAU/USD on pace for its worst performance of the year so far, with futures traders tightening risk on long gold derivatives earlier than expected. Notably, several positions linked to ETF flows shed exposure in sync with the stronger dollar bid.

ETH, by contrast, managed to hold firm above $2,500, broadly maintaining the gains chalked up since April. The uptake of the Pectra upgrade—especially the EIP-7702 smart contract authorisations surpassing 11,000—illustrates tangible developer confidence. This is not merely speculative repositioning. When network participation increases alongside price, there’s typically a medium-term positioning benefit that begins to show up in options open interest. We are already seeing that pre-emptive hedging behaviour pick up with more consistent call spreads being written at higher levels.

Turning to geopolitics, the former administration’s recent tour through key parts of the Middle East was not just symbolic. Several of the joint statements signed are multi-year agreements with delivery pipelines baked in. Considering the nature of these defence and tech-related deals, the downstream effects fall more on industrial equities and manufacturing output indicators over time. From a market-making perspective, the longer view is needed. These contracts won’t impact next month’s numbers, but they’re likely to factor into second-half positioning, particularly in sectors exposed to aerospace and advanced computing exports.

In the next few weeks, we expect derivatives markets to remain event-driven. Short-term setups must be weighed against macro inputs more carefully, especially as traders adjust to the inflation-forward interpretation of recent sentiment data. Timing entries without watching both real yields and dollar funding pressures will be difficult. It’s not a straight path, but the directional cues remain clear when we step out of the intraday noise.

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May’s University of Michigan Consumer Sentiment report is expected today. While many anticipate a decrease in inflation expectations due to recent trade developments, further increases in these expectations would be unexpected.

The Federal Reserve is especially focused on inflation expectations and may exercise caution regarding rate cuts if growth picks up soon. A premature rate cut might lead to increased inflation expectations and rising long-term Treasury yields, contrary to some beliefs.

The Federal Reserve Target Challenge

The Federal Reserve faces the challenge of not having reached its target amid optimistic growth forecasts, potential economic activity surges, tax cuts, deregulation, and existing 10% tariffs. If inflation expectations rise, it may prompt a reevaluation of interest rate expectations across various asset classes.

A hawkish shift may lead to a preference for USD and a decrease in long-term Treasuries. There could also be a reduction in the stock market as current positioning appears overstretched.

These paragraphs highlight how inflation expectations in the United States are being closely watched, especially in relation to the upcoming University of Michigan data. If consumers believe prices will rise more quickly than before, it could mean that people are less confident in the Federal Reserve keeping inflation under control. Central banks often find it harder to manage actual inflation if expectations begin to shift away from target levels. So far, some market participants had anticipated price pressure to soften, likely influenced by recent trade policy revisions, but that assumption may not hold if today’s figures surprise to the upside.

Cautious Stance on Interest Rate Cuts

The central bank, wary of interpreting temporary trends too hastily, is taking a cautious stance—possibly delaying interest rate cuts until higher confidence in disinflation returns. Lowering rates too early, particularly in an environment where the economy starts showing stronger performance, could backfire. It risks fuelling inflation again, especially when fiscal policy is still moderately expansionary. More economic activity puts further pressure on wage growth and consumer prices. Against that backdrop, any uptick in inflation expectations may quickly force expectations around interest rates to shift upward.

Yields on longer-dated bonds could rise as a result, since investors would need higher compensation to lend under less predictable inflation conditions. A pullback in demand for 10- and 30-year Treasuries seems probable if real yields reset higher. That, in turn, might dampen appetite for riskier assets.

Powell and his team appear to be walking a fine line. Positioning across most asset classes suggests that much of the current optimism prices in only benign outcomes—perhaps too optimistically. Overextended long equity and fixed-income positions appear vulnerable if market data starts pushing against the disinflationary narrative.

In the short-term, it seems clear that we need to consider the bond-equity correlation carefully. If a rebound in growth leads the Fed to adjust course, and inflation readings climb higher with it, this may initiate a repricing scenario. From our point of view, it’s better to avoid assumptions of a quick policy reversal. Rather than planning for imminent rate relief, it may be wise to prepare for pricing to reflect higher-for-longer conditions.

Dollar exposure shows signs of becoming more attractive in this setup, particularly with nominal differentials looking less negative. Tactically, there’s little reason to expect a smooth ride in rates-sensitive pairs if incoming CPI and labour figures remain sticky. Treasury futures could stay under pressure should real rates shift back into focus.

With sentiment leaning heavily on the idea that the Fed’s next step involves cutting, any data that challenges this belief would be disruptive. We’ve seen positioning that depends on a soft-landing scenario with little policy tightening—this doesn’t fully reflect the upward risk to rates or the resilience in underlying consumer activity. Equity valuations have run higher while discounting fewer earnings risks, and any move in yields could stir volatility.

From a derivatives perspective, implied volatility curves may look cheap under these conditions. Skew towards downside put hedges might steepen if realised volatility picks up on repricing concern. In this context, shorter-term gamma exposure may offer better entries than committing to duration-heavy views susceptible to mispricing.

It remains best, then, to stay nimble and carefully assess cross-asset dynamics week by week. Sentiment shifts tend to start in rates and ripple outward.

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The University of Michigan’s 5-year US consumer inflation expectation increased from 4.4% to 4.6% in May. This rise in inflation expectations supported the US Dollar, despite weaker indices.

The EUR/USD saw a decline to three-day lows around 1.1130, as the euro faced pressure against a stronger USD. Supporting this was the rise in US consumer inflation expectations.

Forex Market Movements

In the forex market, GBP/USD dipped to 1.3250 as USD-buying resumed. The US Dollar’s strength comes amid increased consumer inflation expectations stemming from the recent U-Mich data.

Gold’s value fell below $3,200 on Friday, reversing gains from the previous day. The decrease was influenced by a stronger US Dollar and reduced geopolitical tension, leading to reduced demand for gold.

Ethereum’s value continued its upward trend, standing above $2,500 after nearly doubling since early April. The recent ETH Pectra upgrade has generated over 11,000 EIP-7702 authorizations, reflecting strong acceptance among wallets and dApps.

Donald Trump’s upcoming May 2025 Middle East visit is poised to create substantial business deals. The deals focus on enhancing US trade relationships and boosting leadership in defence and technology exports.

Market Recalibration

These recent shifts reflect a market recalibration that places growing weight on inflation expectations over immediate economic data. The University of Michigan’s upward revision of 5-year consumer inflation expectations—from 4.4% to 4.6%—sent a clear message: inflation isn’t retreating quickly. And even though stock indices failed to impress simultaneously, the US Dollar scaled higher, drawing strength from the prospect of persistent price pressures.

When the dollar gains like this, it doesn’t do so quietly. We could see that clearly as the EUR/USD skidded to three-day lows around 1.1130. What’s hammering the euro is not some fresh weakness out of the eurozone. Instead, it’s the mere fact that traders now assume the Federal Reserve may hold rates higher for longer. That assumption tilts demand away from the euro and strengthens demand for USD assets. Likewise, sterling isn’t sheltered either—GBP/USD softened to 1.3250, revealing how quickly previous optimism over UK data gets overshadowed once the greenback attracts new flows. The dollar, in this case, isn’t climbing on strength from employment or consumption—it’s climbing because inflation reluctance implies tightened conditions may not ease soon.

Gold’s retreat below the $3,200 level is another moment to unpack. When the dollar climbs while worries about global conflicts subside, traditional hedges like gold quickly fall out of favour. Traders pulled back from bullion, not because of rumbles in macroeconomic performance, but due more to reduced urgency for safer assets and rising opportunity costs of holding non-interest yielding assets like precious metals.

Meanwhile, Ethereum’s advance past $2,500 bucks this broader retracement narrative. The rise, nearly doubling since early April, is being carried by more than general risk appetite. The recent upgrade associated with EIP-7702 has already been widely adopted, with over 11,000 authorisations recorded from wallets and decentralised applications. That sort of traction speaks not to speculative froth but increasing integration, which could attract even more capital if technical indicators keep moving in tandem.

While geopolitical heat has cooled somewhat in recent days, it may not stay quiet for long. The anticipation around former President Trump’s 2025 Middle East visit is already being discussed in boardrooms—especially among firms with vested interests in aerospace, defence, and security contracts. The emphasis on bilateral trade and technology cooperation stands to create tailwinds for certain sectors, even if broader policy details are still being finalised.

So, how to move forward? Watch interest rate expectations more closely than calendar data drops alone. Pressure across FX, commodities, and digital assets is reacting faster to changing inflation sentiment than it did earlier in the year. In derivatives, be prepared for wider swings tied not just to data outcomes, but to what those figures imply for central bank patience. Shorter-term setups might outperform medium-duration positioning if rate outlooks diverge between major economies. Keep an eye not only on inflation reads but also on forward-looking measures embedded in consumer surveys—we’ve seen how even these softer indicators can spark currency realignments.

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US officials plan to send letters soon to other countries for trade deals, while Global Times suggests extending the US-China trade truce. A South Korean delegation will visit the US next week to discuss tariff negotiations, and a potential trade deal is expected after the 8 July deadline.

Regarding interest rates, Fed’s Bostic predicts only one rate cut this year due to uncertainty. ECB’s Villeroy describes the current situation as a trade war, not a currency war. ECB’s Kazāks advocates for a meeting-by-meeting approach, and SNB’s Schlegel states Switzerland is not a currency manipulator.

Market Overview

Markets saw NZD lead and CHF lag, with European equities higher and US 10-year yields down 5.7 basis points to 4.398%. Gold fell 2% to $3,175.20, WTI crude rose 0.3% to $61.80, and Bitcoin climbed 0.2% to $103,712.

The dollar remained stable against the euro and yen, with EUR/USD near 1.1200 and USD/JPY around 145.60. USD/CHF rose 0.1% to 0.8368, while USD/CAD stayed nearly flat. Bond yields slightly decreased, with 10-year yields at 4.40% and 30-year yields at 4.86%.

The article outlines ongoing and upcoming trade negotiations across several major economies, alongside recent central bank commentary and market moves.

Trade discussions are widening, with the United States looking to spark or amend agreements beyond Asia. Correspondence is expected to be dispatched to multiple countries, which signals a fresh round of trade outreach. Meanwhile, commentary from Chinese state-run media points to a preference for preserving the relative calm in US–China trade relations. That timing isn’t incidental; we’re midway through the year, and several deadlines are now in focus.

A delegation from Seoul will soon meet with US officials to review tariffs. It’s understood a deal may be arranged around early July, likely post the 8th, giving both sides breathing room to finalise details. This type of targeted engagement has a useful knock-on effect for industries sensitive to trade frictions, particularly in sectors like semiconductors and automotive goods. For us, it reinforces how specific dates can anchor volatility and set direction even before official agreements are inked.

Monetary Policies and Currency Trends

On the monetary policy front, Bostic gave a clear steer that a rate cut is still on the table but will remain singular unless future data compels otherwise. That creates a narrow policy window. It’s not an aggressive stance, but nor is it entirely hands-off. Villeroy’s analogy of a “trade war” carries weight, especially amid fragmented global policy stances. Notably, Kazāks supported a case-by-case approach to rate decisions—this response framework is more cautious than reactive, and in current terms, it maps neatly to the current inflation path.

For Switzerland, Schlegel clarified their role in currency markets, rebuffing any accusation of manipulation. That’s pertinent; the franc’s underperformance this week happened not because of sharp intervention, but due to overall market alignment around yield differentials. If it signals anything further, it’s that central banks are increasingly vocal in pre-empting narrative drift.

Regionally, the New Zealand dollar outperformed, supported by either soft-landing optimism or forward yield premium—likely both—-while the Swiss franc underwhelmed. Equities in the euro area continued their gradual rise, helped by a pullback in yields and the lack of fresh policy shocks. The US 10-year yield dropped to 4.398%, suggesting confidence that rate normalisation can last a little longer before re-steepening resumes. It’s worth noting that core fixed income continues to drift lower in yield without panic or external catalysts.

Commodities reflected this mixed tone. Gold shed another 2%, now sitting at $3,175.20, which reflects shifting expectations on rates and inflation rather than safe haven outflows. Crude oil, via WTI, added a modest 0.3%, hovering near $61.80 per barrel. It’s unremarkable in volume but more reflective of supply reassessment than demand surge. Meanwhile, Bitcoin ticked up again, quietly registering a gain of 0.2% at $103,712—less about conviction buying and more to do with liquidity shifts driven by cash instruments.

The foreign exchange market was relatively balanced. The dollar was steady—EUR/USD found rhythm near 1.1200, providing little room for breakout trades; USD/JPY hovered around 145.60, with minimal intervention chatter; USD/CHF inched up 0.1% to 0.8368. Broadly, this suggests sustained interest rate spreads are holding firm across G10. USD/CAD barely budged, again highlighting how stable petroleum names often correlate with neutral CAD flows.

In rates, 10-year bond yields settled at 4.40% while 30-year treasuries edged to 4.86%. This yield compression supports the outlook that we’re not in a dislocation phase, but rather tracking expectations that don’t yet require recalibration. For those watching the next few weeks closely, the implications are clear. Yield stability plus modest FX adjustments limit room for leveraged repositioning. The next shift will likely come from policy minutes or scheduled data surprises—not the flow itself. Let’s stay patient and alert across sessions.

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